Fiscal year about to end with red ink still on the books

Gov. Dannel P. Malloy’s hopes of avoiding a post-election deficit continue to dwindle with $116 million in red ink remaining in a fiscal year that ends in one week.

And the administration even used the dreaded fiscal “D-word” while acknowledging the prospect of a shortfall in its most recent budget update to Comptroller Kevin P. Lembo.

“In accordance with existing law, any remaining deficit will be extinguished via transfer from the budget reserve fund as part of the process of closing out the fiscal year,” Malloy’s budget chief, Office of Policy and Management Secretary Benjamin Barnes, wrote to Lembo last Friday.

Barnes was reporting at that time that a deficit of about $165 million had been reduced to $116 million. And while the improvement was due in part to better-than-anticipated corporation tax receipts, it also stemmed from various specialized account raids and last-minute cuts to hospitals and municipal aid ordered by the legislature.

Though the state’s fiscal year runs from July 1 to June 30, the comptroller doesn’t technically close the books until September. That’s because certain tax receipts continue to accrue during the summer to the prior fiscal year’s budget.

Having to tap the emergency reserve, commonly known as the Rainy Day Fund, traditionally is recognized as the sign of a deficit.

By law, the comptroller cannot close the books in the red. If the outgoing budget is unbalanced in September, funds must be taken from the reserve to close any gap. A final option for the state is to borrow the money.

A deficit of $116 million represents only two-thirds of 1 percent of the general fund. But the state only has $519 million — an amount equal to 3 percent — in the Rainy Day Fund. Lembo has said the state needs to build a 15 percent reserve to help safeguard its finances against the next recession.

“The bottom line is we have to wait and see what the numbers look like over the next couple months before there is a determination,” Malloy spokesman Devon Puglia said. “We may very well come in right on target. But let’s also put this in perspective. We’re talking about a tiny fraction” of the budget.

Malloy, who won re-election to a second term last fall against Greenwich Republican Tom Foley, repeatedly stated “there won’t be a deficit.”

In most instances, the governor actually was referring to the $1.3 billion shortfall nonpartisan analysts were projecting for the 2015-16 fiscal year, the first new fiscal year after the election.

The governor’s critics argued in that case he was engaging in semantics rooted in a legal technicality. Under state law, the legislature and governor must adopt a balanced budget. If a deficit is projected, it must be closed — using spending cuts, tax hikes, added revenue, or some combination.

In other words, the governor was saying there only were “deficit projections,” but there wouldn’t be an actual deficit in the next new budget.

But what about the 2014-15 fiscal year?

Republican legislators and even Lembo — a Democrat – warned even after that budget was adopted that there were some holes in it.

Lembo said the package did not include enough funds to cover contractually required retirement benefits for state workers — a problem that did actually materialize.

Republicans also questioned whether a last-minute assumption that an extra $75 million in miscellaneous revenues would be achieved. The state has fallen short of this target to date.

GOP leaders pressed Malloy repeatedly over the winter to begin bipartisan talks with the legislature on deficit mitigation efforts. And while the governor rebuffed this offer, Republicans — who claimed to have several cost-cutting ideas — refused to disclose them in the absence of bipartisan talks.

“I’ve said it before and I’ll say it again: Governor Malloy’s hesitation has led to devastation,” Senate Minority Leader Len Fasano, R-North Haven, said. “This is exactly what we have been warning the governor about. Taking a ‘wait and see’ approach to closing an imminent and growing deficit is not leadership. Turning a blind eye to the reality of a problem only makes that problem worsen.

“Governor Malloy has chosen to live in his fantasy land of no deficits,” Fasano said. “He has said repeatedly that ‘there won’t be a deficit.’ But there is a deficit. It is here, it is now, and it is real. Even with the fund sweeps in the governor’s budget, the deficit still stands.”

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Keith, with Jacqueline Rabe Thomas, won first prize in investigative reporting from the Education Writers Association in 2012 for a series of stories on the Board of Regents for Higher Education. The former State Capitol bureau chief for The Journal Inquirer of Manchester, Keith has spent most of 24 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut's transportation and social services networks. A former contributing writer to The New York Times, Keith is a graduate of and a former journalism instructor at the University of Connecticut. E-mail him at kphaneuf@ctmirror.org.

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